Introduction


Although not as stylish and elegant as the automobile sector, the UK vacuum cleaner industry has over 93% forecasted household penetration and at least six million units sales each year (MTProg 2006).  However, along with the growth forecasts, only less than half of the future sales will be accounted for new and additional unit buyers.  This is an indication that the industry is facing market contraction that triggers stiff competition.  Vacuum cleaner manufacturers must be able to provide innovative versions of earlier products as replacement accounts for almost 70% of future sales. 


Dyson Corporation, the inventor of bagless vacuum cleaners, is one of industry players in the UK market.  It is established in 1993 by James Dyson in Wiltshire (Dyson Website 2008).  Central to the success of the company is the cyclone technology, formally referred as Root CycloneTM, which uses centrifugal force that separates dust and dirt from the air which allows stable suction capabilities, cleaner air discharge and other value-added features.  The technology’s prototype called G-force that is sold in Japan has even hit a price of ,000 per unit in 1991.  Its featured online products are broadly classified into three categories; namely, upright, cylinder and hand-held.


There are at least twenty Dyson vacuum cleaner models available in the market.  They are marked DC1, 2 and so on reflecting the current innovation from the original G-force model which varies on color, weight, suction power, filter ability and other upgraded features.  Aside from its major vacuum cleaner business, Dyson also entered but discontinued production of innovative ball-barrow (i.e. a wheelbarrow that uses plastic ball instead of metal wheels) as well two-drummed washing machine (e.g. for stronger dryer).  Currently, it introduces a breakthrough hand dryer called Dyson Airblade which only requires 10 seconds to dry the wet hands.  The quality of their vacuum cleaners is guaranteed through testing for bacterial growth, continuous prototyping for improvement and diligent testing for endurance and reliability.         


 


Operational Control


 The innovative nature of Dyson situates its budgeting position on zero-based method particularly on the production of a series of G-force improvement models.  It is also showed on how the company confronted production risks with expanding product lines such as ball-borrow and washing machine including potential success in its breakthrough hand-dyer.  Zero-based budgeting (ZBB) necessitates Dyson to allocate its annual budget starting at base zero.  This means that previous year-end income and expenditure figures are seemingly useless in creating budgets for highly-innovative products.  Due to this, controlling performance and costs for laboratory prototypes post problems and the firm must take action to prevent past losses in its ball-borrow and washing machine inventions.       


            For an effective ZBB, determination of underlying costs for the ambiguous prototype is vital.  This would help in appropriate pricing using internal data and would tell whether the company has the price advantage or simply innovative upper-hand to existing competitors.  This stage is important because this is the part by which the firm will create cost parameters and will be use in every financial metric that will be applied in the future.  If the parameters are wrong, Dyson will price its products on a sub-optimal manner because relevant costs are not injected in the performance analysis.  In aggravation, this mistake will be carried into the life cycle of the prototype from its introduction to the market, growth and eventual demise.  Further, even though correct parameters are installed, there are adjustments to be made on a periodic basis.  This is because newer products face greater influence from the external environment such as regulation, prices of raw materials and response from distributors.  In effect, creating a trial-and-balance budget (e.g. flexible budgets) using the ZBB framework is necessary.   


In product upgrades and marketing of new accessories, ZBB would be shed proxy from incremental method.  As mentioned earlier, the vacuum cleaner industry is showing signs of market contraction which provide opportunities to offer newer models or product/ accessory upgrade.  For the latter strategy, incremental method demands reference from previous cost performance which is likely on an annual basis.  A vacuum cleaner model will be positioned as a stable production.  As a result, previous cost parameters and periodic adjustments are highly relevant to future engagements such as upgrades and development of product add-ons.  In fact, based on the twenty models that Dyson developed over the years since 1993, much of the improvements have singular platform which is the G-force model.  ZBB is largely evident to extreme developments of G-force and also creation of ball-barrow, washing machine and had-dryers.


            Activity-based costing (ABC) method might offer the best costing practices to Dyson and probably finally succeed in product introduction and support its innovation-centered design culture.  The method will define major activities in the creation of the firm’s products.  This may include research design, testing, prototyping, raw material acquisition, machining, quality assurance, receiving and packing.  These activities have substantial overheads in them due to supervisory intervention in the assembly line, quality specialist in the receiving area and highly computerized processes.  The method can determine the cost of each activity, thus, reducing the difficulties of allocating the seemingly invisible overheads.  Next, the cost driver for each activity is required in order to allocate the total cost of each activity to each product line (e.g. vacuum clear models).  By capturing these components, it will be easy to control the cost driver based on the budgeted cost pool.


            To illustrate this, we will use the ZBB.  Assuming that there are three primary activities that Dyson have in its production; namely, prototyping, machining and packing.  The cost of each is 0, 0 and 0 respectively.  The products that are ordered are G-force and DC-1 for 100 and 110 units respectively.  Direct labor for G-force is for two hours (e.g. per hour) and DC-1 is for four hours (e.g. per hour).  In traditional costing, if total overhead is ,000 and the total direct labor is 200 hours, the overhead is allocated on a labor hour basis totaling per hour.  As a result, the traditional costing will result for overhead allocation in G-force is 0 per unit and DC-1 is 0.  However, when ABC method is applied, the results in Table 1 will show the big difference in costing.  Although the results showed that the costing of Dyson using traditional method overpriced its products, in most cases, it is the inability of this method to reflect all overhead cost post the major problem.


            As observed, ABC method can improve the costing parameters of ZBB or incremental budgets.  The products of Dyson and vacuum cleaner models are produced by different number of labor hours and machine hours which can obtain various times that each activity occurred in their respective production processes.  This can give Dyson flexibility in using the same budget spreadsheet to allocate overheads of each product line.  Another, the budgets that the firm uses can be easily flexed to reflect potential changes in the operating environment.  For example, the demand for G-force units is lowered, the estimated cost of the production will be easily viewed.  In effect, faster quotation of the products will be provided to clients.  Top management also has baseline information on how efficient labor or machine performed during a particular production cycle.  If the overhead cost of prototyping has increased, it is easy to detect where the problems occurred (e.g. in the production of G-force or DC-1). 


            Dyson can also use the ABC spreadsheets to forecast, flex and experiment on either ZBB or incremental budgeting.  In doing this, the company will be more vigilant of its status when an unexpected drop in demand occurred in the future due to stiffer competition and inability of its innovation to capture the market taste.  It can establish pro-active solutions to upcoming risks and even disastrous events that can lead its sales virtually to zero.  With or without exaggeration, building cost pools and flexing them according to economic and market expectations can provide useful information to Dyson.  Rationalizing product introduction can also be achieved.  The company can use the ABC spreadsheet to know whether being efficient in machining (e.g. reduction of times the machine is used) can contribute in cost-savings.  These savings can then be distributed to key innovation areas (e.g. hand dryers).  ABC method can open new opportunities to Dyson particularly on providing additional strategic options.  With greater competence on decision-making, it can operate more competitively and know the benefits of minimizing production errors are.  Finally, performance indicators (e.g. ROA) can be improved without trade-off to other balance scorecard components (e.g. employee motivation)                 


                  


Operational Planning


ABC method proved to be useful in Dyson simply because the manufacturing process of the firm is substantially affected by human intervention.  On extremely computer-operated production assemblies, the benefits that ABC can provide are limited due to minimal activities involved.  However, even with ABC compatibility with Dyson style of production, it is not an easy task to integrate the method into the production process.  As admitted, Dyson production process involves several human interventions which make change in cultural production an issue of operational planning.  Kaizen also invokes reduction of wastage which is vital to the efficiency benefits of ABC control on operations.  Further, the balance scorecard suggests that financial and customer objectives are as important as employee motivation and welfare.                       


            The adoption of ABC method should be initiated from the top management to the bottom rank-and-file.  This will ensure commitment to the production and costing change including allocation of the right resources that will fund training, performance benefits and improved conditions of work.  When the managers are committed, appraising the performance of the organization towards the early parts of ABC adoption will be continuous.  As a result, changing the culture of manufacturing will be done gradually and based on integration to human and environmental conditions of the site.  Empowerment is crucial in changing work systems as employees feel that they are important components of a quality product.  In effect, any change in production guidelines and flow charts must be settled with machine operators, quality specialists, scientist and even sweepers. 


            It is no doubt that James Dyson is one of the most visionary and cunning vacuum cleaner inventors of all time.  However, the passion to produce innovative products must be coupled with collaboration with subordinates.  The move of transferring production sites in Asia is an example of bypassing the role of employees particularly in UK (BBC News 2002).  Although cost-savings are assured with cheap labor and affordable space rental, the skills of former employees are detached with the production processes.  As a result, it is likely that efficiency in operating the machines or assembling parts are lost.  ABC implementation to create budgets must not be all based on financial benefits and short-term savings.  Rather, the experience of employees in setting-up the production lines and their specialization in assuring quality must be on top of Dyson top management.  In this way, ABC adoption is aligned with production culture.          


 


Strategic Control


The firm should change its current system and replaced it with ABC technique.  This can especially gain beneficial returns when the firm decided to expand the up-market brands which would reflect the same manufacturing complexity and labor-intensiveness of some products.  If product line expansion is carried in the coming years, much more the significance of ABC is eminent because the manufacturing processes of up-market products are riskier compared to low-cost products.  As a result, proper costing is required for the company to maximize the benefits of the expansion.  Since ABC also allocates indirect costs to the overhead like transportation, the up-market products can provide easy allocation for the firm in distant places such as Asian countries.  The issue here is the transfer of value from normal places (i.e. UK) that may not be recognized by the firm and shipping costs are not included in the current system. 


In its current manufacturing situation, its semi-automated process does not make “machine hours” a concrete basis for settling an overhead rate.  Emphasizing the error on a company-wide agenda only aggravates the problem.  Also, current departments such as packing and shipping are done manually and so it is obvious that “machine hours” does not represent the cost driver for general expenses of each department.  Further, the firm is a value-based producer where it presently made success through market position.  However, its profit continued to slump for consecutive years suggesting that demand-side approach to business is lacking.  As a result, supply-side should achieve value the same manner as the demand-side.  Since the current costing had made substantial understatements especially for some product lines, it showed that it cannot reflect measurement of cost-related efficiencies.  ABC can provide such data for the firm to improve its value chain in producing risky and low-volume up-market product line.        


The firm should use ABC approach especially in its up-market products.  These products are considered labor-intensive, risky processes and substantial process investment compared to other counterparts.  In effect, costing approach should be more conservative.  In the operational issue, it should acquire new and dedicated machines for up-market products to increase productivity and also revenues.  It should exploit the lucrative market by coupling investment strategy and costing techniques.  Further, it should continue to produce and design up-market products for the next years to maximize the adoption of ABC technique.  When machines are acquired, ABC can assure that the interference of labor in the process is accounted and this claim creates the synergy that exists between ABC adoption and strategy to expand product line.


Ultimately, the firm can focus its operations into the up-market demand.  It should close its low-cost product line by transferring the brand name its hand-held products are admired for to the up-market products.  For example, the firm can create discounts in bulk purchases or sell the products in retail markets for ease of discounting promotion.  It should obtain an integrated product portfolio where the up-market is prioritized and brand name retained due to the change in market environment.  This issue is concretized by the fact that the cost of shipping and machine investments will increase once the firm continuously create up-market products.  The rise in such costs may require substantial investment which may affect liquidity of the firm.  As a result, its low-cost business portfolio should be gradually reduced and retire once the brand name transfer is effectively executed.   


      


Strategic Planning


            Initially, there is an understatement for the cost of producing some products because they are machine-based units.  At the strategic side, abrupt adoption of ABC which necessarily leads to increase in market price especially of the some products can reduce competitiveness of the firm.  This is true especially when there are similar products in the market where up-market producers have lower prices.  Thus, ABC has the weakness of infusing its findings instantly and directly in the market and even investment strategies of the firm in the case of purchasing new assets.  Even if the firm has the information and measurement of performance, it has limited use of them because of the stakeholders involved.  The recommendations above also are not recourses that can be executed immediately.  Time, money and effort are elements necessary to make them reality but the firm is not a low-cost producer and substantial investment in assets, processes and change in strategy is possible due to financial depth and experience curve.    


            In general, ABC is incompatible with mass production processes and machine-intensive products because activities are minimal.  This is why some products are understated under ABC because human intervention is very small.  Second, collecting data such as activities and “levels” can be tedious and costly.  A small manufacturing company may not afford the requirements of implementing a company-wide ABC adoption.  Computer systems, trained personnel and continuous evaluation in the manufacturing and non-manufacturing activities should be applied which can be impractical for small manufacturers.  In the behavioral side, ABC can create managerial resistance because it can show the inefficiencies of the processes where their departments are link.  Without support from managers, ABC adoption would be futile. 


 


Table 1: ABC Method versus Traditional Costing


Activity


Overhead Cost


# of times in G-Force


Overhead


Allocation


# of times in DC-1


Overhead


Allocation


prototyping


0


once


0


2


0


machining


0


2 times


0


3 times


0


packing


0


once


0


2 times


0


TOTAL


 


 


0


 


,100


Per Unit Overhead


 


 


0/ 100 units =


 


,100/ 110 units =


Total Cost (ABC Method)


G-force: Overhead + Direct Labor = + =


DC-1: Overhead + Direct Labor = + =


Total Cost (Traditional Costing)


G-force: Overhead + Direct Labor = 0 + = 0


DC-1: Overhead + Direct Labor = 0 + = 0


 


Books


 


Young, S 2000, Readings on Management Accounting, 3rd edition, Prentice Hall, NJ.   


 


Lewis, R 1993, Activity-Based Costing for Marketing and Manufacturing, Quorum Books, Westport, CT.


 


Electronic Sources


BBC News 2002, viewed on 4 January 2008 <http://news.bbc.co.uk/1/hi/business/1801909.stm>


 


Dyson Website 2008, viewed on 4 January 2008 <www.dyson.co.uk>


 


MT Program 2006, viewed on 4 January 2008 <http://www.mtprog.com/ApprovedBriefingNotes/PDF/MTP_BNXS30_2007November15.pdf>


 


 



Credit:ivythesis.typepad.com



0 comments:

Post a Comment

 
Top